DAY BRIGHT DEVELOPMENT LTD AND OTHERS v. MAN SHIU INVESTMENT CO LTD AND OTHERS

LDCS 15000 / 2012

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE APPLICATION NO. 15000 OF 2012

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JUDGMENT

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The Application

1.  This is an application (“the Application”) made under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap. 545 (“the Ordinance”) for an order of compulsory sale of all the undivided shares of Section B of Inland Lot No. 5741 (Nos. 724 & 726 King’s Road and Nos. 19 & 21 Nation Street, North Point, Hong Kong) (referred to as “the Lot”).

2.  The existing building (“the Building”) on the Lot is a block of 9-storey commercial/residential building.  The front elevation of the Building is facing King’s Road with the rear elevation facing Nation Street, which is a private right of way.  There are 4 units at each level, with 4 ground floor shops and 32 upper floor residential units from the 1^st to 8^th floors.  Each of the shops and residential units is given 1 of 36 undivided shares of the Lot.  The Building forms part of the larger development commonly known as Kut Cheong Mansion. The occupation permit (which covers the Building and other adjacent buildings) was issued on 8^th September 1960, more than 50 years before the Application.

3.  At the time of the filing of the Application dated 1^st February 2012, the Applicants owned 88.8889% of the undivided shares of the Lot.  By the time of the filing of the witness statement of Hui Lok Shan (“Hui’s Statement”), the representative of the Applicants, dated 17 December 2012, the Applicants had further purchased the 1^st Respondent’s unit, which increased the Applicants’ share to 91.6667% of all the undivided shares of the Lot.

4.  At the time of the filing of Hui’s Statement, the outstanding units were as follows:

(1) The 2^nd and the 3^rd Respondents (8/F of No. 726 King’s Road) and their mortgagee, joined as the 6^th Respondent.  Since then, the 2^nd Applicant has purchased the unit of the 2^nd and the 3^rd Respondents, and the Applicants have discontinued the proceedings against the 2^nd, the 3^rd and the 6^th Respondents;

(2) The 4^th Respondent is sued as the Personal Representatives of Chui Yuk Chun, the deceased registered owner of the 4^th Respondent’s unit (G/F of No.724 King’s Road). The agents of the Applicants negotiated with Ms Ko Kit Mei, who claimed to be the daughter of the deceased registered owner, and then with her solicitors, Messes. George Chan & Co which led to the following events:

(a) The execution of the Provisional Agreement for Sale and Purchase of 19^th August 2011 between Ms. Ko as the intended administrator of the estate of the deceased registered owner and the 2^nd Applicant. The Provisional Agreement provided for the execution of a formal agreement and completion after the grant of letter of administration. The parties have extended the deadline for the execution of the formal agreement by correspondence;

(b) Ms. Ko refused to represent the estate of the deceased registered owner and according to the Applicants’ enquiries there were no other beneficiaries of the estate willing to represent the estate.

(c) Two  orders were made by the Tribunal:

(A) Service of the Notice of Application on the 4^th Respondent be dispensed with ; and

(B) The proceedings be proceeded with in the absence of a person being appointed to represent the estate of the deceased registered owner and any judgment or order to be given or made in these proceedings would bind the estate of the deceased registered owner.

(3) The 5^th Respondent is Fung Chi Wa Jive, appointed to represent the Fung Chiu Choi, the deceased registered owner of 8/F of No.19 Nation Street. The following events occurred:

(a) Jive Fung made an Application for a grant of letters of administration of the deceased registered owner and informed the Applicants’ agents that his brother, Fung Kai Wah and himself were the only beneficiaries of the estate of the deceased registered owner;

(b) The execution of the Provisional Sale and Purchase Agreement of the 5^th Respondent’s unit dated 3^rd January 2011 between the 3^rd Applicant and Jive Fung and Fung Kai Wah as the intended administrators for the estate of the deceased registered owner, which provided for the execution of the formal agreement and completion after the grant of letters of administration of the estate of the deceased registered owner. The parties extended the deadline for the execution of the formal agreement twice by correspondence;

(c) To cover for the possibility that the trial and the compulsory sale order may be granted before the granting of the letters of administration of the estate of the deceased registered owner and completion of the sale and purchase of the 5^th Respondent’s unit, the Applicants through correspondence between the parties’ solicitors are making efforts and offering to the Fungs an alternative method of performing the spirit of the Provisional Sale and Purchase Agreement which in short is to ensure that, in the event of the grant of the compulsory sale order, the 5^th Respondent will obtain from the proceeds of sale of the amount agreed as the purchase price under the Provisional Sale and Purchase Agreement.

5.  In short, as submitted by the Applicants in the opening of the trial, the outstanding respondents of the Application are the 4^th and the 5^th Respondents: (i) the 4^th Respondent is really in the position of a missing owner; and (ii) the 5^th Respondent is not opposing the Application.

6.  Section 3(1) of the Ordinance requires the majority owner making the application to own not less than 90% of the undivided shares in the lot in question, but it is subject to subsection (5).  Subsection (5), which is in turn subject to subsection (6), stipulates that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in subsection (1) in respect of a lot belonging to a class of lots specified in the notice. Subsection (6) stipulates that no percentage may be specified in a notice under subsection (5) which is less than 80%.  By virtue of section 3 of the Land (Compulsory Sale for Redevelopment)(Specification of Lower Percentage) Notice, Cap. 545 (“the Notice”), the percentage in section 3(1) of the Ordinance is lowered to 80% in respect of a lot that belongs to any class of lot specified in section 4 of the Notice.  One of the classes of lot specified in section 4 of the Notice is a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date.  The relevant date is defined in section 2 of the Notice to mean the date of the application.

7.  In other words, for a building with the occupation permit issued more than 50 years before the date of the application for compulsory sale, the majority owner is only required to own not less than 80% of the undivided shares of the lot.  As the occupation permit of the Building was issued more than 50 years before the Application and the Applicants did have more than 80% of the undivided shares of the Lots at the date of the Application, the Applicants were clearly entitled to make the Application for the compulsory sale of the Lots .

Determination of the existing use values (“EUV”) of all units in theBuilding

8.   Under section 3 of the Ordinance, the Applicants have made the Application accompanied by a valuation report as specified in Part 1 of Schedule 1, prepared not earlier than 3 months before the date of the Application, containing the assessments of the values (of all units which are conveniently termed as the existing use values, the “EUV” of all units) in the Building on the Lot.

9.   Under section 4(1)(a)(i), if there is a dispute between the parties on the EUV of the units in the Building on the Lot, the Tribunal has to determine the values. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the Tribunal that the value of the minority owner’s property as assessed in the application is “(A) not less than fair and reasonable; and (B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

10.    In the Application Report of 28 November 2011, Mr. Charles Chan (“Mr. Chan”) of Savills Valuation and Professional Services Ltd, the Applicants’ valuation expert, explained the method of valuation and the process of his assessment to arrive at the EUV of each unit of the Building.

11.    In Mr. Chan’s second valuation report, the Supplemental Report of 7 December 2012, he (1) reviewed the EUV of the units as at 28 November 2011, which was prompted by inspection of the internal condition of more units of the Building and the availability of the confirmed property indices for time adjustment since the Application Report; and (2) set out the 2 economic tests to assess whether redevelopment is justified from the economic perspective. In the Supplemental Report, Mr. Chan repeated the exercise he did in the Application Report with the new information and set out the assessments of the EUV of each unit:

 (1) the 4^th Respondent’s unit (G/F of No.724 King’s Road) is assessed at $13,900,000 (representing 12.43% of the total EUV of all units);

 (2) the 5^th Respondent’s unit (8/F of No.19 Nation Street) is assessed at $1,710,000 (representing 1.53% of the total EUV of all units); and

 (3) the total EUV of all units is assessed at $111,810,000.

12.    I accept the EUV valuation of Mr. Chan. I determine that for the purpose of this Application, the EUV of all units in the Building, including the 4^th Respondent’s unit and the 5^th Respondent’s unit are as shown in the valuation report of Mr. Chan as stated above.

13.    The Applicants in the present Application invite the Tribunal to determine that the EUV valuation as shown in the valuation report attached to the Application Report (as revised subsequently in the Supplemental Report of Mr. Chan dated 7 December 2012) satisfies Section 4(1)(a) for both of the units owned by the 4^th Respondent (i.e. the missing owner) and the 5^th Respondent (even though the 5^th Respondent has filed no notice of opposition).

14.    As I accept the expert valuation evidence of Mr. Chan as set out above, I am satisfied that the value of the 4^th Respondent’s unit and the 5^th Respondent’s unit as assessed in Mr. Chan’s Supplemental Report is not less than fair and reasonable and not less than fair and reasonable when compared with the value of the Applicant’s properties as assessed in the same report.

Justification for Redevelopment

15.       The second determination under Section 4(1)(b) of the Ordinance is whether the order of compulsory sale should be made.  According to Section 4(2) of the Ordinance, this would involve 2 statutory requirements, namely :-

(a)  is the redevelopment justified due to age or state of repair of the Building; and

(b)  has the Applicant taken reasonable steps to acquire all the undivided shares in the Lots.

16.       The Applicant has to satisfy this Tribunal that the above statutory requirements were met, otherwise, an order of compulsory sale ought not be granted. 

17.    Firstly, as for the requirement under (a) above, I have considered the expert opinion of Mr. Benson Wong (“Mr. Wong”), the building surveyor, Mr. So Kin Shing (“Mr. So”), the structural engineer and Mr. Chan, the valuation surveyor. The conclusions of their expert reports are summarized below.

18.    Mr. Wong in his Condition Survey Report of 13 December 2012 examined the various features of the physical obsolescence of the Building, and examined, in details, each component of the Building, identified the defects in the state of the repair and formulated the necessary repairs for (a) the building elevations, (b) the main roof, (c) the staircases and lobbies, (d) the flats and shops internally, (e) the aboveground plumbing, (f) the aboveground drainage, (g) the underground drainage, (h) the electrical installations, and (i) the fire services installations.

19.    Mr. Wong set out the features of obsolescence of the Building which do not comply with current construction standards and statutory requirements and some of which give rise to real safety concerns. He stated that the Building is also aged in the sense that there has not been sufficient repair or renovation work over the years to maintain them in tenantable condition.

20.    Based on his examination of the components of the Building and the structural assessment of Mr. So, Mr. Wong concluded that,

“(a) the Building is in a poor state or repair;

(b) the defects found in the structural frames, components, finishes and service installations are of the nature and magnitude that cannot be easily made good by simple and piecemeal repairs;

(c)      substantial repairs are required to be carried out in order to restore the Building to the tenantable standard.”

21.      Mr. Wong assessed that the total cost of immediate repairs works at $8,609,942. He further noted that “the costs of immediate repair is about 42% of the cost of constructing a new building similar to the Building” and that “this very substantial repair cost indicates that the deterioration of the Building is very serious and has reached a state which is beyond economic repair.”

22.      Mr. Wong concluded, (a) “As signified by the high repair cost, the Building has deteriorated to a state which will beyond reasonable economic repair. As more rapid deterioration will occur in the future, the necessary maintenance and repairs will inevitably be more frequent and extensive, making the continued occupation of the Building not practical and economical”; and (b) “In my opinion, the age and state of repair of the Building, each on its own, is justification for redevelopment of the Building which has become obsolete over time and is in a poor state or repair. Based on my experience as a building surveyor practising in the field of building maintenance, repair and redevelopment for 31 years, I recommend the owners to redevelop rather than repair the Building, particularly bearing in mind that the Building does not possess any historical value or architectural merit, and is merely a building of the past that can be replaced.”

23.    Mr. So conducted a structural assessment of the Building and prepared a report dated 12 December 2012 setting out:

(a)   the structural details of the Building;

(b)   the design working life and how the design of the Building is absolete in various aspects;  

(c)   the tests and

(d)   the test results.

24.    Mr. So concluded that,

(a) “both the high carbonation depths coupled with excessive chloride content in the concrete has caused the corrosion of the embedded steel reinforcement bars”;

(b) “the structural frames of the Building are deteriorating and the corrosion of the steel reinforcement bars and concrete covers being penetrated by carbonation are the results of the age and/or lack of repair of the Building”;

(c) “according to the current condition of the structural frames, the deterioration will continue steadily due to extensive carbonation of the r.c. structural members” and “it is inevitable that new defects will occur and previous defects though repaired will recur readily”;

(d) there are 9 aspects that the Building designed and constructed 52 years ago cannot meet with the current structural engineering design requirements; the structural performance of the structural frames of the Building may be deficient and the design and construction of the structural frames have become absolete over time; and

(e) the Building has passed its design working life of 50 years and “has exhibited signs that its structural frames have deteriorated to the final stages of their design working life.”

25.    In his Supplemental Report dated 7 December 2012, Mr. Chan conducted the “repair test” and “age test”. In the “repair test” he concluded that:

(a) having considered his research findings, the existing condition and characteristics of the Building and the scope of repair works recommended by Mr. Wong, the effect of the repair works will bring, according to his estimate, about 3% enhancement to the Domestic portion of the Building;

(b) applying the enhancement percentage, his estimate of the enhancement in market value after the repair works is about $2,743,500 (3% of the EUV of the domestic portion); and

(c) when compared with the repair cost net of unauthorized building works related items at $7,109,349 with the estimated enhancement in market value after the repairs, it is obvious that the repair works are not economically viable and the carrying out of the repairs is not economically justified.

26.    In the “age test”, Mr. Chan concluded that,

(a) when comparing the RDV of the Lot ($154,000,000) and the aggregate market value of the existing units ($144,340,000) as at 7 December 2012, it is obvious that redevelopments is economically justified as the RDV of the Lot exceeds the market value of the existing units; and

(b) Although the market value of the existing units of the Building could be increased to $147,083,500 if a net repair costs of $7,109,349 were spent as recommended by Mr. Wong, he considered that no reasonable owner will incur such expenditure in repairs since (i) the net increase in the market value of the existing units brought about by the repairs is less than the repair costs and (ii) given the RDV of the Lot is $154,000,000, the owners of the Lot can immediately realize the full RDV if they dispose of the Lot in the open market without spending a single dollar on repairs.

27.    I accept the above items of expert evidence of Mr. Wong, Mr. So and Mr. Chan. I am satisfied that redevelopment of the Building and the Lot is justified due to age and/or state of repair of the Building, particularly bearing in mind the unreported judgment of the Tribunal in Charmlink Ltd v Lee Tong Hing & others (LDCS 16000/2010, unreported) handed down on 29 November 2011:

(1)  “….the Tribunal has discretion to determine at what stage a building should be redeveloped after considering all the relevant factors concerning the age of the building in question. The relevant factors in the present case are that the Building is over 50 years old and it has passed its designed life. It is also absolescent in designed and not economical to maintain. All these factors point to the fact that the Building has come to an end of its physical as well as economical life. Thus, we find that redevelopment Is justified on the ground of the age of the Building” (paragraph 30; and see the similarity of the expert evidence summarized in paragraphs 23-28) .

(2)    “It is also within the Tribunal’s discretion to determine in what conditions a building should be redeveloped after considering all the relevant factors concerning the sate of repair of the building in question. With the clear evidence from the two experts that the Building is in a poor state of repair and in fact untenantable without substantial repair works to be carried out over a long period of time, we have no hesitation in finding that redevelopment is justified by the state of repair o the Building” (paragraph 31).

Reasonable Steps Taken

28.    The Applicant is under an obligation to negotiate on terms that are fair and reasonable in a situation when the whereabouts of a minority owner are known. This obligation is not a mandatory requirement for the Applicants in respect of the 4^th Respondent. Nevertheless, for the 4^th Respondent, the Applicants submitted that they have taken reasonable steps, as follows:

(a)  The 4^th Respondent is a missing and deceased registered owner without any grant of letter of administration (whose whereabouts is unknown for the purpose of S.4(2)(b));

(b)  There is no obligation and it is legally impossible for the Applicants to acquire 4^th Respondent’s unit and undivided shares;

(c)   The above notwithstanding, the fact that the Applicants managed to enter into the Provisional Sale and Purchase Agreement with Ms. Ko (who claimed to be the daughter and beneficiary of the deceased registered owner) with provision of a formal agreement and completion conditional upon Ms Ko being letters of administration of the estate of the deceased registered owner is sufficient to satisfy the Tribunal that the Applicants have taken reasonable steps to acquire 4^th Respondent’s unit and undivided shares.

29.  Similarly, for the 5^th Respondent (who is not opposing the Application), the Applicants submitted that,

 (a)  Again the fact that the registered owner of 5^th Respondent’s unit died without anyone managing so far to obtain any letters of administration makes it legally impossible for the Applicant to acquire 5^th Respondent’s unit and undivided shares.

 (b)  this notwithstanding, the Applicants (i) managed to enter into the Provisional Sale and Purchase Agreement with Jive Fung and his brother, the tow then said to be applying for letters of administration of the deceased registered owner and (ii) are making efforts and offering the Fungs an alternative method of performing the spirit of the Provisional Sale and Purchase Agreement. These efforts should be and are sufficient to satisfy the Tribunal that the Applicants have taken reasonable steps to acquire 5^th Respondent’s unit and undivided shares.

30.    I am satisfied that reasonable steps have been taken by the Applicants in respect of both the 4^th Respondent and the 5^th Respondent.   

Reserved Price for the Auction

31.    The Applicants submitted that the reserve price for the auction of the Lot should be fixed at $156,000,000, based on the assessment by Mr. Chan of the redevelopment value (“RDV”) of the Lot as at 21 February 2013 in his valuation report of the same date (Trial Bundle F1). The 5^th Respondent did not oppose this assessment.

32.    I have carefully considered Mr. Chan’s valuation of the RDV of the Lots.  I note and agree with him that although there were direct land sale transactions on Hong Kong Island in the past 12 months, they were all not suitable for direct comparison purpose because “of the substantial disparity in development potential due to different attributes on location, development scale and development restrictions” between the Lot and the land sale comparables.  I also agree with him that as a last resort, the residual method has to be employed as the method of assessment of the RDV of the Lot.

33.    Mr. Chan opined that the optimum development on the Lot comprised a block of 26-storey hotel with entrance lobby and retail shops on G/F, back of house on 1/F and hotel guest rooms on the upper floors with details of the hypothetical development and residual valuation set out in Appendix IV (Bundle F1/20-22), and details of the comparables with adjustments in Appendix V (for shops at Bundle F1/24) and Appendix VI (for hotels at Bundle F1/26).  I have gone through his valuation in details.  I am satisfied with his valuation, including the valuation assumptions he has adopted, the values and the costs parameters that he has used in his valuation. 

34.    Based on the open market value of the Lot reflecting its redevelopment potential, i.e. the RDV of the Lot, of $156 million as assessed by Mr. Chan at 21 February 2013, I decide that this should be the reserve price for the auction of the Lot.

Trustees

35.    I find that Ms Yeung May May, Betty and Ms Li Wing Yin, Amy of Messrs. Kao, Lee & Yip, solicitors, nominated by the Applicants, are suitable persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  Their remuneration at the rate of $5,500 per hour (subject to the maximum amount of legal fees charged, exclusive of disbursements, of not more than $50,000)  as mentioned in the letter from Messrs. Kao, Lee & Yip to the Applicants’ solicitors dated 1March 2013 is also reasonable and will be allowed accordingly.

Particulars and conditions of sale of the Lot

36. The particulars and conditions of sale of the Lot by public auction submitted by the Applicants are also reasonable and will be adopted accordingly.

Time for completion of redevelopment

37. The Applicants submitted that as stipulated in Schedule 3 of the Ordinance, and subject to such further period as the Tribunal may allow, the redevelopment of the Lot shall be completed and made fit for occupation within 6 years after the date on which the purchaser of the Lot became the owner of the Lot.  I agree.

Costs

38. Since the 4^th Respondent is a missing owner, and both the Applicants and the 5^th Respondent do not ask for costs, I will give a costs order that there be no order as to costs.

Conclusion

39. As aforesaid, I am satisfied that the value of the 4^th Respondent’s property as assessed at $13,900,000 is fair and reasonable and is fair and reasonable when compared with the value of the Applicant’s properties as assessed. I am also satisfied that (a) the redevelopment of the Lot is justified due to the age and state of repair of the Building (b) the Applicant has taken reasonable steps to acquire all the undivided shares in the Lot.  Having considered the above, I am therefore satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the Applicants should be granted.

Orders

40. I therefore grant the following orders:-

(1)   The Tribunal is satisfied that each of the values of (a) the 4^th Respondent’s property (G/F of No. 274 King’s Road) in the sum of $13,900,000 and (b) the 5^th Respondent’s property (8/F of No. 19 Nation Street) in the sum of $1,710,000 as shown in the tables of B3.5 of the Supplemental Report of 7 December 2012 (i.e. Trial Bundle B1/ page 6) of Mr. Charles Chan of Savills Valuation and Professional Services Limited is fair and reasonable and is fair and reasonable when compared with the Applicants’ properties in the Building as set out in the same tables.

(2)   All the undivided shares in the Lot, the subject of the Application herein, be sold by public auction for the purposes of the redevelopment of the Lot.

(3)   Ms Yeung May May, Betty and Ms Li Wing Yin, Amy of Messrs. Kao, Lee & Yip, solicitors, nominated by the Applicants, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustees under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs. Kao, Lee & Yip to Messrs. Mayer Brown JSM dated 1 March 2013.

(4)   For the purposes of a sale of the Lot by public auction under section 5(1)(a) of the Ordinance,

(a)  the sale of the Lot be on the particulars and conditions substantially the same as those in the draft Particulars and Conditions of Sale initialled and approved by the Tribunal;

(b) the reserve price be set at $156,000,000; and

(c)  subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot became the owner of the Lot.

(5)   Liberty to the Applicant, the 4^th Respondent, the 5^th Respondent and the Trustees to apply to the Tribunal for further directions as may be required under the Ordinance.

(6)   There be no order as to costs.